By Jeffrey Bukhari and Elly Yu

After taking one of the largest hits during the financial crisis, the housing market in Phoenix has rebounded markedly in the past year.

As home prices have risen more than 11 percent nationally since March 2012, the Phoenix area has seen values jump more than 30 percent over the same period. The driving force behind the national increase has been a tight supply of homes. There is currently only a 4.7-month supply of homes on the national market, compared to a normal supply of six to seven months. The supply is even tighter in Phoenix, where there are only enough homes available to last 2.3 months.

Though the Phoenix market is currently enjoying a rapid rise in values, the climb will taper off starting next year. Prices fell during the housing crisis nearly 60 percent in the Phoenix area, meaning many homes are still not worth their purchase price despite the recent gains. Once prices raise high enough to allow homeowners to break even or turn a profit on their houses, many of homeowners will put their homes on the market. The tight supply that drove the boom will loosen up considerably, leading prices to level off.

“Those price increases last year and the price increases this year will cause a lot of inventory next year,” said John Wake, a real estate agent in Phoenix. “And also since prices will be higher, demand will be down a bit.”

The national housing market, which has seen less violent swings than Phoenix but has nonetheless echoed the area’s trends since the crisis, will also see supply open up and limit price increases.

There are several unique factors in the Phoenix market that put it at the forefront of both the housing crash and recovery.

Though foreclosures were a huge problem all over the country during the financial crisis, Arizona was on the leading edge of distressed homes. Because of state law, lenders could easily foreclose on homes without a judicial process, which led to a record number of foreclosed homes. Whereas the foreclosure process may take up to three years in other states, the process can be settled in as little as six months in Arizona. Predatory lending was also prevalent, particularly towards Hispanic families who did not fully understand the paperwork they were signing, which exacerbated the foreclosure problem in the area.

In November 2009, the worst foreclosure month in the Phoenix area, there were over 50,000 pending foreclosures, compared to just 9,400 in April 2013. With so many extra homes on the market, prices fell rapidly.

“A foreclosure is a forced sale. So you have all those regular people selling, plus these foreclosures,” Wake said. “And that’s what killed the market because there was a huge additional supply to the normal supply.”

Large private investment firms, like Blackstone and Colony Capital, saw and seized the opportunity. The percentage of homes bought by investors in July of 2012 was 39.7 percent. Today, it is 27.5 percent, but economists say it’s still well above the normal level of 15 percent.

Many investors bought the houses cheaply and rented them out to the same families who had already been foreclosed on. These families had no choice but to rent because they could no longer qualify for a home loan, which buoyed the rental market up even further. Prices for homes fell precipitously and the demand for rentals mounted.

“Home prices actually over-corrected, which is why investors were swooping in. They were getting steals,” said Walter Moloney, spokesperson for the National Association of Realtors.

Once investors soaked up the last of the extra supply brought by the foreclosure backlog, prices started to bounce back. Among all home mortgages in Arizona, the foreclosure rate is now down to 1.5 percent, down from a high of 4.7 percent three years ago and well below the national average of 3.5 percent, according to Lender Processing Services.

The tight supply has heated up the market, causing multiple bidding on single family homes and hurting first time homebuyers who can’t compete with investors and cash buyers.

“Almost every property that is in the lower 25 percent price range, every listing that comes up, is going to get multiple offers,” said Michael Orr, director of the Center for Real Estate Theory and Practice at Arizona State University. “Very often more than 20. I’ve seen one that even got 95.”

Meanwhile, builders also haven’t been building new homes as quickly as they have been before.

A boom in home construction would normally be expected to offset the low supply levels, especially in the Phoenix area, where there is a lot of open space surrounding the city that is cheap and easy to build on. But there has been no significant increase in homebuilding. Construction fell sharply after the crisis, and has remained at about half the amount as it used to be, according to the Census Bureau.

There were roughly 3000 starts per month in the area from 1998 through mid-2007. After the crisis, that number collapsed, reaching a low of 293 in February 2009.

Homebuilders had been reluctant to ramp up construction to meet demand because of lessons learned from the housing crisis. Many construction workers also left the state after failing to find work, while many migrant workers returned to Mexico.

“New construction was one of the reasons that the whole thing tanked at the beginning,” Wake said. “Those guys built far beyond when the game was over. It was obvious that the game was over and they were still cranking out huge numbers of new homes.”

But housing starts have picked up recently as demand grows. There were 1220 housing starts in the Phoenix area in March, which is nearly 50 percent higher than in September 2012.

“Homebuilders are speeding up, but they collapsed so much that even this speed up doesn’t bring them back up to normal,” Orr said.

It will take about two years for housing starts to reach healthy levels, Orr said, which will progressively give buyers more options over the next couple years as new homes are built at a faster pace.

But even as more new homes are put up for sale, the average family may not be able to take advantage. Strict lending regulations have slashed the pool of authorized mortgage borrowers for the foreseeable future, especially in the Phoenix area, where many would-be buyers are hampered by too little credit history or a past foreclosure.

“People who already can afford their mortgage are getting it even cheaper by refinancing,” Orr said. “But the people who need it most, first time homebuyers, that don’t have much of a track record or a really good credit rating, it’s easy for them to end up with a no.”

Potential first-time home buyers in Phoenix like Nicole Morgan and her husband can only hope good deals are still around when they can eventually get financing.

“I’m not in a career line to get approved for a loan,” Morgan said.

Though both Morgan and her husband have their own business, their lack of long-term history hindered their chances of securing a mortgage. But despite their trouble, they should not worry about prices increasing indefinitely while they wait.

Market conditions are near a tipping point, with the life of the sources of the tight housing market near an end. The price increases that are projected to continue throughout the year will ultimately cause gains in home values to slow after that.

“I think the market will be very different next year,” Wake said.

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